Automating Technical Analysis and Strategy Backtesting with Python

Import all the packages we need

Get our data - one Line API call

Here we use our get_timeseries function to return us hourly OHLCV for cable (GBP=). As FX doesn't carry volume directly - we can use count as a surrogate. We then rename the columns so they can work with charting and backtesting software downstream. Note the dataframe comes back already indexed on timestamp. 

2930

Pandas TA package is very useful tool to create various technical analysis features with ease

Types of Indicator

Cycles(1), Momentum(41), Overlap(33), Performance(3), Statistics(11), Trend(18), Utility(5), Volatility(14), Volume(15) as well as Candlestick Patterns (64) are provided by the package ready for you to implement - and as we will see implementation is a breeze. The breadth of indicators means that you can experiment to your hearts content with combinations of indicators etc. We can look at what these are as below:

Pandas TA - Technical Analysis Indicators - v0.3.14b0
Total Indicators & Utilities: 205
Abbreviations:
aberration, above, above_value, accbands, ad, adosc, adx, alma, amat, ao, aobv, apo, aroon, atr, bbands, below, below_value, bias, bop, brar, cci, cdl_pattern, cdl_z, cfo, cg, chop, cksp, cmf, cmo, coppock, cross, cross_value, cti, decay, decreasing, dema, dm, donchian, dpo, ebsw, efi, ema, entropy, eom, er, eri, fisher, fwma, ha, hilo, hl2, hlc3, hma, hwc, hwma, ichimoku, increasing, inertia, jma, kama, kc, kdj, kst, kurtosis, kvo, linreg, log_return, long_run, macd, mad, massi, mcgd, median, mfi, midpoint, midprice, mom, natr, nvi, obv, ohlc4, pdist, percent_return, pgo, ppo, psar, psl, pvi, pvo, pvol, pvr, pvt, pwma, qqe, qstick, quantile, rma, roc, rsi, rsx, rvgi, rvi, short_run, sinwma, skew, slope, sma, smi, squeeze, squeeze_pro, ssf, stc, stdev, stoch, stochrsi, supertrend, swma, t3, td_seq, tema, thermo, tos_stdevall, trima, trix, true_range, tsi, tsignals, ttm_trend, ui, uo, variance, vhf, vidya, vortex, vp, vwap, vwma, wcp, willr, wma, xsignals, zlma, zscore

Candle Patterns:
2crows, 3blackcrows, 3inside, 3linestrike, 3outside, 3starsinsouth, 3whitesoldiers, abandonedbaby, advanceblock, belthold, breakaway, closingmarubozu, concealbabyswall, counterattack, darkcloudcover, doji, dojistar, dragonflydoji, engulfing, eveningdojistar, eveningstar, gapsidesidewhite, gravestonedoji, hammer, hangingman, harami, haramicross, highwave, hikkake, hikkakemod, homingpigeon, identical3crows, inneck, inside, invertedhammer, kicking, kickingbylength, ladderbottom, longleggeddoji, longline, marubozu, matchinglow, mathold, morningdojistar, morningstar, onneck, piercing, rickshawman, risefall3methods, separatinglines, shootingstar, shortline, spinningtop, stalledpattern, sticksandwich, takuri, tasukigap, thrusting, tristar, unique3river, upsidegap2crows, xsidegap3methods

Lets see how easy it is to create some Bollinger Bands

Here we will use a popular indicator in the volatility catergory - Bollinger Bands. First we will make a copy of our base price dataframe and then append the bollinger bands feature to the new dataframe. We pass some parameters such as window length of 50 periods, using an simple moving average. We can see the BBL (lower), BBM (mid) and BBU (upper) features, amongst others added to the right of the frame.

We can now easily plot these as one would in a Workspace chart - its not as polished as the Workspace chart - but this is for programmatic usage mainly as opposed to in-depth interactive detailed visualisation.

Candlestick pattern recognition 

As we noted earlier there are 64 candlestick patterns that can be identified in both bullish and bearish configurations. Bullish structures are indicated with +100 and bearish structures are indicated with -100. In our case we are using hourly data so we are notified in the hourly row when the signal was generated. Again we simply make a copy of our original prices frame and then append all candlestick patters to that dataframe. One can of course select only the indicators you are interested in.

2930 rows × 67 columns

It can be a bit difficult to see when these signals are being generated from large dataframes - so you can check the min and max readings to see if any bullish or bearish signals are present.

Lets use Matplotlib Finance package to create some candlestick charts with ease

We can use the candlestick charts to help us visualise when these candlestick patterns fire - first lets create a candlestick chart and then overlay a candlestick signal - in our case the CDL_3INSIDE (3 inside candles pattern - which is a compression signal which can present in both bullish (+100) and bearish (-100) variants.

Implement backtesting of a strategy using BackTrader package

So we have seen how we can automate the creation of Techincal Analysis indicators very easily from a dataframe of prices. The ease with which we executed this is kind of remarkable. The next stage we can go to - is to use these indicators to create a trading strategy and to then test its efficacy through backtesting. This is also relatively easy to accomplish using the BackTrader package. First lets make a copy of our original dataframe.

Set up a simple SMA crossover strategy using built-in strategy

The BackTrader package uses a base strategy class which you can use to inherit from to build your own custom strategy. In our case we will be implementing 2 trading strategies firstly a simple moving average crossover (MA XOver) strategy and then a slightly more complex combinatorial strategy where we only take signals in the direction of the trend.

smaCross strategy

First you can see this is composed of a list of parameter (in our case the window length for the moving averages). Next an init section which defines both the indicators from the bt.ind collection and also the crossover event itself. Note that the cross over event is bidirectional - though one can change this etc. Finally we have the trading logic section which uses the previously defined event signal (crossover signal) and combines it with our position information to inform an action. In our case we have defined to actions - 

* If we do not have a position and we have a bullish cross (ie fast sma crosses slow sma from below) then take a position

* If we do have a position and we have a bearish cross (ie fast sma crosses slow sma from above) then close the position

Note - we don't allow shorting in this first strategy for simplicities sake. We will include shorting in the second of our strategies.

Candle Mix Stategy

Here we extend our basic smaCross strategy by say introducing a candlestick pattern - in this case the 3Inside candlestick pattern. 

Now that we have our two strategies defined - we can pass it to our broker object which we configure to run the strategy we just created. From below we can see that the first section is where we initialise the bt.Cerebro object - setting our initial cash level and also commission rates. Next we add the strategy we just created and then define a data object which we wire up to our pandas dataframe, and specify the from and to dates as datetime objects and as we are using hourly bars we set the timeframe to be minutes with a compression rate of 60. We then add the data to the broker object and run the backtest and finally we format the standard chart output generated.

For easy multiple strategy tests - I have created a generalised brokerObject function from the basic package documentation which takes a number of parameters in order to create a valid backtest of a valid strategy and just configured it to return the cerebro.plot object which contains all the results. 

Conclusion 

In this article we have seen how we can very easily generate Technical Analysis features using Pandas_TA / TA_Lib packages. These work seamlessly with the output from our Eikon Data API and are simply appended to the right of the dataframe. We have also seen how we can eyeball these indicators using basic charting in Python. In particular we have shown how we can plot candlestick patterns firing on a chart with real simplicity. 

We then went on to take things a little further by creating some simple trading strategies using our indicators in the strategy template of the backtrader package and then wired that up to the backtrader broker object that conducted the backtest for us and outputted a series of plots that visualised the strategy and sig-gen, P&L and such. 

This is really the simplest workflow I have seen for backtesting trading strategies - and whilst there are undoubtably more sophisticated packages and approaches - particularly for live streaming strategies - I think this is a great introductory approach and worthy of your attention. 

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